Bare Trusts and Adult Children on Title: Tax at Death in Canada

Many families put a home or other property in an adult child's name for convenience, often with an understanding that the child holds it for the parent. That kind of arrangement is commonly called a bare trust. When the parent dies, the question is whose property it is for tax purposes.

This article explains how the federal rules on death generally work, where a T3 return fits in, and what to gather. Whether your own arrangement counts as a bare trust, and how it should be reported, depends on the documents and the facts.

This article covers Canadian federal tax law, which applies in every province.

What a bare trust means in plain words

A bare trust is generally an arrangement where one person holds legal title to property but has no real say over it and holds it for someone else. The person on title is often called the trustee, and the person the property is held for is the beneficial owner.

How a bare trust affects the tax rules at death depends on the specific facts and the paperwork behind the arrangement, so it is worth confirming with a lawyer before you assume the property is or is not part of a parent's estate.

How CRA treats property the deceased owned

On death, a taxpayer is deemed to have disposed of each capital property immediately before death for proceeds equal to its fair market value. The tax is carried by the final return, not by an inheritance tax.

The gain or loss is the fair market value on the date of death minus the adjusted cost base, reported on Schedule 3 and line 12700 of the final return. The gain is reported by the deceased on the final return, not by the beneficiaries.

The person who acquires the property because of the death is deemed to acquire it at the time of death at a cost equal to its fair market value immediately before death. That figure sets the heir's adjusted cost base.

Homes, spouses and other exceptions

• Principal residence: a gain on the deceased's home may be fully or partly exempt, but the property must still be reported on Schedule 3 and designated on Form T1255.
• A home's gain is fully exempt if it was the principal residence for all years owned, or all but one, and no other property was designated for those years.
• A cottage or second property cannot be designated for a year in which another property of the family unit is designated, so part of the gain on the other may be taxable.
• Spouse or common-law partner: where property is transferred as a consequence of death to a spouse or common-law partner resident in Canada, the deceased is deemed to dispose of it at its adjusted cost base (or, for depreciable property, the lesser of capital cost and cost amount) instead, but only if the property vests indefeasibly in the spouse within 36 months after death or a longer period the Minister allows on written application.
• The legal representative may elect that the spousal rollover not apply, property by property.

If the home is held in a child's name under a bare trust and the parent was the beneficial owner, these rules may apply to it as if the parent held title. Confirm that with a lawyer or accountant before relying on it.

Where the T3 return fits

Income the estate earns after death, and gains on property the estate sells after death, are reported on the estate's T3 Trust Income Tax and Information Return, not on the final return. The T3 return is due 90 days after the trust's year-end.

A late T3 return can attract an alternative penalty of $25 per day, with a minimum of $100 and a maximum of $2,500, even with no balance owing.

Whether the bare trust arrangement itself has separate reporting duties, and who must file, depends on its terms and the CRA's current requirements. Ask a lawyer or accountant to confirm this before the first filing date passes.

What to do next

• Find any written trust declaration, agreement, or letter showing why the child is on title.
• Gather purchase records, improvement records and proof of who paid carrying costs.
• Keep a record of the property's fair market value on the date of death.
• Note that current maintenance and repairs cannot be added to the adjusted cost base.
• Ask a lawyer or accountant whether the property belongs on the final return, the T3, or both.
• Do not distribute estate property until you have dealt with the clearance certificate question.

Frequently asked questions